Despite the slowdown in lending growth and continued buoyant deposit growth, Qatar’s loan to deposit ratio remains “stubbornly” in excess of 100%, Citi Research has said in a report.
Moreover, question marks persist over the quality of the loan growth in the past two years and possible implications for future asset performance, Citi said in a report.
The growth, it said, was fuelled by high levels of government deposits and directed mainly at the public sector, making the banking sector a conduit for credit to government institutions.
“While we have few concerns over the creditworthiness of the government itself, the extent of leverage in the public sector has consequently risen, and the commercial rationale for many of the infrastructure projects and other investments that the bank funds could potentially be financing has, in many cases, yet to be demonstrated, in our view,” it said.
Moreover, the rising share of consumer and real estate lending, amid stagnant corporate lending, is also a cause for concern.
First, it highlights the limited role the private sector plays in the economy. Second, the rise in personal and real estate borrowing also speaks to a relatively high credit risk profile in private sector lending, and is potentially fuelling some of the imbalances in the Qatari economy, the report said.
According to Citi, credit growth in Qatar continues to slow down with total growth falling to just 13% year-on-year in December, from 26% a year earlier.
This has been mainly due to a slowdown in lending to the government, which rose by just 9% in December, compared with over 27% a year earlier. Lending to the private sector has remained stable at around 15% for the last five months, the report said.
Although Qatar’s inflation remains subdued, Citi sees pressures building, particularly from the real estate market.
While headline inflation remained low in February (at 2.7% year-on-year), there were inflationary impulses from rent and utilities as well as food prices.
The resurgence of inflation in the housing sector does indicate a potential acceleration in overall price levels going forward.
Since the beginning of 2009, property prices and rents had been on a steady decline, keeping overall inflation subdued, and sometimes even negative.
For almost two years, however, rent inflation has registered in positive territory on a year-on-year basis, although it has been steady in the 5% range.
“While we continue to see fundamental weakness in the real estate market emanating from a large supply overhang which will be exacerbated with the completion of further ambitious projects, prices have recovered in the past year, owing mainly to the surge in the Dubai property market. We expect prices to continue to rise over a 1 – 2 year horizon, putting further upward pressure on CPI inflation going forward,” said.
According to Citi, Qatar’s housing sector will get a boost from the substantial infrastructure spend that is under way in the country ahead of the 2022 World Cup.
Moreover, in so far as property prices are correlated in the region, particularly in the UAE, Qatar and Bahrain, it expects to see some support from developments in the Dubai property sector.
“That said, we believe overall pricing should remain soft due to the substantial supply overhang and risk of further large-scale development completions. This should help contain inflationary pressures for the foreseeable future,” Citi said.
